As one U.S. airline after another went through bankruptcy over the past decade, Seattle’s hometown carrier adapted to the new era of low-fare, low-cost air travel, avoided bankruptcy and found a way to thrive.
To cut costs drastically, Alaska Air Group outsourced airplane maintenance, cabin cleaning and then baggage handling.
In tough labor negotiations, it wrung pay and other concessions from its pilots and flight attendants unions.
It yielded to the industry trend of charging fees for checked bags.
These moves secured financial stability. When competitors pulled back, Alaska Air took opportunities to grab new and profitable routes, opening more than 60 in the past five years. Its performance over the last two years propelled Alaska Air Group to No. 3 in this year’s Best of the Northwest survey of publicly traded companies.
The growth, in turn, restored labor relations and employee morale, which are essential to delivering quality passenger service.
“The transformation over the last decade has been all about cost,” Chief Executive Brad Tilden said. “We’re trying to balance low fares and lots of service to the destinations (passengers) want, with a strong and successful company that can grow and buy new airplanes and has the capital to add new services.”
The financial results are impressive.
The parent company for Alaska Airlines and its regional sister carrier Horizon Air made a record $508 million profit in 2013, and the stock continued a steep ascent to five times its value from just five years ago.
Operationally, a J.D. Power survey of passengers last month ranked Alaska Airlines No. 1 in customer satisfaction among traditional North American carriers for the seventh consecutive year. It also ranked its mileage plan as the best among all U.S. airlines.
In recent years, reliable on-time performance and good cabin service have helped Alaska Air beat back sharp competiton for market share at Seattle-Tacoma International Airport. It’s also the largest volume carrier at Portland International Airport.
Last year, Alaska Air Group (which includes Horizon Air) carried about 39 percent of PDX passengers, or about 5.9 million passengers.
“Long-term success is driven by having a low-cost structure, low fares, great operational performance and engaged employees who deliver a great passenger experience,” said Tilden. “Alaska does well on all those fronts.”
Michael E. Levine, a former senior airline executive now on the faculty of New York University School of Law, said Alaska Air has fended off all previous head-to-head rivals in its home market by astutely managing its costs and its service and leveraging its dominance at Sea-Tac.
“The Pacific Northwest has been a growth area. Alaska has captured a significant chunk of that growth,” he said.
Getting there was difficult.
Among several tough confrontations with its unions as it slashed costs, in 2005 the airline outsourced 472 baggage-handling jobs.
Yet “it never turned so ugly that it destroyed their business,” Levine said. “They convinced their labor force they’d have to become competitive. ... They got their costs low enough so they could compete with Southwest.”
The key financial metric used in the industry to compare airline cost structures is “cost per available seat mile,” or CASM, reflecting the cost in cents to fly a single seat one mile.
Alaska Air’s costs are much closer to those of the low-cost carriers than to the big network carriers.
In 2013 financial filings, Alaska Air reported CASM of 12.82 cents. That was close to Southwest Airlines at 12.6 cents. Delta’s figure was 14.77 cents.
Tilden stoutly defends the painful labor cuts of the mid-2000s that lowered costs significantly.
“Most airlines made much more severe changes through bankruptcy,” Tilden said. “Alaska did better by our employees by managing the situation ourselves.”
Last year, the airline signed long-term agreements with three of its unions and recently reached tentative five-year agreements with both the Alaska Airlines flight attendants union and with the Machinists union representing its clerical and passenger service employees.
Alaska Air Chief Financial Officer Brandon Pedersen says the focus on cutting costs has built a stronger company that is a boon to the Pacific Northwest.
Not only is the airline doing well, but with its growing fleet of jets, it’s boosting local airplane manufacturing.
It will take delivery of 10 new 737-900ERs from Boeing this year and 11 more next year. And from 2017, it will take the first of 37 new 737 MAXs on order.
“We have been growing. We’ve been hiring people, creating good-paying jobs and buying airplanes from the Boeing Company,” said Pedersen. “All in all, it has worked out.”